Yahoo to Buy Online Music Seller for $160 Million

By SAUL HANSELL

Published: September 15, 2004

Correction Appended

In a move to expand its role in the online music business, Yahoo announced yesterday that it would buy Musicmatch, a company that sells music online, for $160 million. The move puts Yahoo in direct competition with Apple Computer's iTunes, Microsoft's new music store and RealNetworks in the small but growing market for online downloads of music.

Yahoo already has a significant advertiser-supported free music business, with Internet radio and music video channels, along with information and discussion boards about music. The services are based on technology it acquired with Launch Media, which it bought in 2001 for $12 million. Yahoo has also introduced an Internet radio service that offers more choices and better sound quality but charges a fee. But until now, it has not offered users the ability to buy and download songs.

Musicmatch, which started selling songs online last year for 99 cents each, gives Yahoo that ability.

''Music is one of the most-used applications on the Web,'' said Dan Rosensweig, Yahoo's chief operating officer. ''Our objective is to be the leading player in the digital music world.''

Musicmatch is best known for its Jukebox software, which allows users to organize their electronic music collections. It also offers an Internet radio service and a $9.95-a-month subscription service that lets users listen to any of its 700,000 songs on their personal computers.

While some analysts have suggested that $160 million was a high price for Musicmatch, whose annual revenue was estimated at $50 million, Mr. Rosensweig said the cost was justified.

''The industry is already so big and it is accelerating,'' so that getting a music service to the market quickly is crucial, Mr. Rosensweig said.

Phil Leigh, the president of Inside Digital Media, a market research firm, said that the most significant piece of the deal for Yahoo was not Musicmatch's store but its software.

''The biggest part of online music today is people taking their existing CD collections and moving them to their PC's,'' Mr. Leigh said. Musicmatch is a leader in the music software market, with 55 million registered users. Yahoo hopes to sell more songs to those users.

But Mr. Leigh said that Musicmatch had a significant flaw because its songs cannot be played on Apple's iPod devices, by far the most popular portable music players. Until recently, only Apple's iTunes store sold songs for the iPod, though RealNetworks recently introduced technology -- which has drawn strong objection from Apple -- that allows songs sold by its online store to play on the iPod.

''Of the tracks people are paying to download,'' Mr. Leigh said, ''the majority of them are going on iPods.''

But Mr. Rosensweig said that by next year, non-Apple music players will represent the majority of the market, making compatibility with the iPod less crucial.

While there is no question that Apple is the leader in selling downloadable songs, there is debate about how the rest of the market is divided. Mr. Rosensweig said Musicmatch was No.2. RealNetworks said its music store was second (and was second even before it ran a three-week campaign offering songs at 49 cents each.) Mr. Leigh, however, said he thought Musicmatch and Roxio's Napster were tied for second.

Market share for music subscription services is somewhat clearer. RealNetworks says it has 550,000 subscribers to its music services. America Online has 260,000 subscribers to its MusicNet service. And Musicmatch has about 225,000 paying subscribers. Napster does not disclose its subscriber count.

Yahoo does not disclose how many people subscribe to its pay radio service.

Mr. Leigh said that he thought other companies, including Amazon.com, had been trying to buy Musicmatch, and that Amazon was likely to make a move to expand its online music business.

''This provides more incentive to Amazon for them to fish or cut bait in music,'' Mr. Leigh said. ''I think they will fish.'' He said the most logical move for Amazon would be to acquire Napster. An Amazon spokeswoman, Patti Smith, and a spokeswoman for Napster, Dana Harris, both declined to comment.

Photo: Yahoo's purchase of Musicmatch, where Andres Salmon, left, and Chuck Black work, gives it the ability to sell song downloads. (Photo by Sandy Huffaker/Associated Press)

Correction: September 16, 2004, Thursday
An article in Business Day yesterday about Yahoo's acquisition of the online Musicmatch service, referred imprecisely to songs that can be played on the Apple iPod. While RealNetworks' online store is the only one besides Apple's to sell songs in the protected iPod format, other companies sell them in the MP3 format, which the player can also use.

The article also misspelled the given name of a spokeswoman for Amazon.com, who declined to comment on speculation that her company might want to acquire Napster, a rival to Musicmatch. She is Patty Smith, not Patti.